Investors face a longstanding dilemma with equities: they provide access to much-needed portfolio growth but are often the major source of potential volatility and steep declines. Finding a solution to this dilemma is the focus of the first “Black Paper” written by Blackstone Private Wealth Management, “Taking Stock: Long/Short Hedge Funds and Equity Replacement.”

The paper looks at the constraints long-only equity managers face, and how reserving some portion of the equity allocation for long/short hedge funds may provide more “efficient” exposure to the stock market: Long/Short Equity Hedge Funds have historically offered equity-like returns with lower volatility and shallower peak-to-trough declines.(1) The paper examines the performance of long/short equity hedge funds, defines the category’s varied investment universe, and outlines an approach to portfolio construction.

The paper can be downloadedhere, or via the education section of the CFA Institute here, where Continuing Education credits may be available.

(1) Among the universe of such funds as represented in the HFRI Equity Hedge Index (our proxy for long/short equity), returns compare well with the broad equity market, as represented by the S&P 500 Index, over the past 20 years. What’s more, these results have been achieved at roughly half the volatility level of the long-only index. In down months for the S&P 500 over the last 20 years, long/short equity hedge funds suffered only a third of the broad equity market’s decline. Past performance is not indicative of future results. There can be no assurance that hedge funds will achieve their investment objectives or avoid significant losses. There is no assurance that any hedge fund will perform in a manner consistent with or even similar to the HFRI Equity Hedge Index.